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Notwithstanding, too, what is called the inquisitorial nature of the tax, no amount of inquisitorial power which would be tolerated by a people the most disposed to submit to it, could enable the revenue officers to assess the tax trom actual knowledge of the circumstances of contributors. Rents, salaries, annuities, and all fixed incomes, can be exactly ascertained. But the variable gains of professions, and still more the profits of business, which the person interested cannot always himself exactly ascertain, can still less be estimated with any approach to fairness by a tax collector. The main reliance must be placed, and always has been placed, on the returns made by the person himself. No production of accounts is of much avail, except against the more flagrant cases of falsehood; and even against these the check is very imperfect, for if fraud is intended, false accounts can generally be framed which it will baffle any means of inquiry possessed by the revenue officers to detect: the easy resource of omitting entries on the credit side being often sufficient without the aid of fictitious debts or disbursements. The tax, therefore, on whatever principles of equality it may be imposed, is in practice unequal in one of the worst ways, falling heaviest on the most conscientious. The unscrupulous succeed in evading a great proportion of what they should pay; even persons of integrity in their ordinary transactions are tempted to palter with their consciences, at The Law of Tax and the Common People 71 least to the extent of deciding in their own favour all points on which the smallest doubt or discussion could arise; while the strictly veracious may be made to pay more than the state intended, by the powers of arbitrary assessment necessarily intrusted to the Commissioners as the last defence against the taxpayer's powers of concealment." [At the time J. S. Mill was writing the Additional Commissioners were normally responsible for Schedule D assessments.] It seems to me that Mill is unduly pessimistic. Large areas of the system operate seemingly satisfactorily and without undue evasion.

The system of deduction at source appears to have worked well enough in nineteenth century circumstances. More recently it has shown signs of strain as applied, for example, to subcontractors.

Possibly the legal concept of what constitutes an employment needs to be reviewed. Possibly the extensive operation of deduction at source could discourage and inhibit evasion if some modified rate of deduction, less than the basic rate, were available. PAYE has perhaps failed to match up to the complexities of "perks" and benefits in kind. This is an area which might usefully be investigated by such a committee as has been suggested could assist Parliament in keeping the statutory code under review.11 As to Mill's comments on the disclosure of incomes, it may be that we are not ready to accept being stripped of all our pretences.

Our affectionate regard for appearances may not be wholly contemptible or absurd. But perhaps more could be done in the way of recognising that the details of A's affairs, as disclosed to the inspector, may properly be relevant in ascertaining B's liability.

Within the limits of relevance there would seem to be no good reason why the position of one taxpayer should not be considered when testing the position of another. Moreover, if it is appropriate that there should be two quite separate departments and codes of law governing the collection of income tax and VAT, it would at least be reassuring to know that the information collected in relation to the one tax is, and can properly be, made available to check calculations pertaining to the other. It is not doubted that all these matters receive constant and earnest attention from the authorities. The appointment of Lord Keith's Committee is a welcome indication that action is to follow attention.

Mill's comments preceded by many years the arrival of the See above Chap. 2.

See above Chap. 2.

72 The Law of Tax and the Common People accountant on the tax scene. The earliest reference to accountants in the tax code appears to have been the 1903 provision13 to the effect that if General Commissioners refused to permit a barrister or solicitor to plead before them or to hear any accountant, the appellant could take his appeal to the Special Commissioners who would be bound to hear the barrister, solicitor or accountant. It would appear to be the case that since their arrival accountants have had and continue to have a profound and important effect on standards of reporting for tax. Of course, no production of accounts will prevail against all classes of falsehood. Fingers will continue to be dipped in the till unobserved, undetected and unreported. Cash receipts will continue to by-pass record books. It may be that the original principle, accept the assessment or tell all, needs to be looked at again in relation to standards of book-keeping, accounting and reporting. Why should simple, minimal standards appropriate to different classes of small business not be identified? At the level of the larger company where high standards of auditing prevail and the disciplines imposed by the Companies Act are operative, the impression is that, always excepting deliberate, intricate frauds, evasion is held well within manageable bounds.

There is an aspect of the supply of professional services which is common to accountants and lawyers alike; how are the common people to be protected from professional incompetence? It is a matter of concern to professional bodies in relation to open proceedings. At the level at which practitioners and tribunal at first instance in tax matters meet, the General or Special Commissioner level, there is no publicity and no pecuniary penalty may be awarded to remind those concerned of the need to maintain basic standards of competence, punctuality and reliability. There are areas of the United Kingdom where the unqualified, or less than adequately qualified, practitioner appears to play a not unimportant role in the process of quantifying and fixing liability for tax. It sometimes occurs to me to wonder whether the professional bodies are aware of what is done, or more often not done, under the guise of supplying professional services.

It does seem possible that in this, as in other respects, the whole question of publicity would merit reconsideration in the context of evasion and avoidance. I have suggested why so much importance seems to have been attached to privacy in tax matters. John Stuart s. 13 of The Revenue Act 1903 (3 Edw. VII, c. 46).

See above Chap. 1.

The Law of Tax and the Common People 73 Mill at least doubted the need for it.15 Others have raised the same issue.

In their 1870 Report the Commissioners of Inland Revenue commented: "There is indeed a provision in the Income Tax Act which authorises the District Commissioners to impose treble duty when a surcharge is confirmed on appeal, but there is an almost invincible repugnance on the part of the Commissioners to exercise this power... It would greatly strengthen our hands if proceedings in such cases could be taken in the local tribunals, either at Sessions of the Justices or in the County Court, instead of the Court of Exchequer, where the process is dilatory and expensive; and, unless the defendant resists, which is never the case, conducted throughout without any publicity."

The specific comment is now, of course, out of date. All has changed. Criminal prosecutions for tax frauds take place before the ordinary courts in the ordinary way and receive the ordinary degree of publicity attendant upon such proceedings. What might repay consideration is whether "back duty" cases, that is cases where fraud, wilful default or neglect to a culpable degree, is alleged against a taxpayer and proceedings take place before general or special commissioners, to recover tax which would otherwise be out of time for assessment, should not be capable of being heard in open court rather than inevitably behind closed doors. Similarly proceedings for penalties, whether for failing to make returns or for failure as an employer to operate the PAYE regulations might be better, and more effective, if open.

It is intriguing to note that the 1905 Departmental Committee presided over by Mr. Ritchie16 recommended that the Revenue should have power to publish names and particulars in cases of gross fraud.

When it comes to cases involving tax avoidance, it is at least open to argument that nothing would do more to inject realism into the topic than to bring such cases into the open not merely when they come before the court, as now, by way of case stated, but at the earlier stage when evidence is given by those who have participated in the artificial transactions commonly involved, and by those who have devised and sold the schemes affected. The 1955 Royal Commission seemed to suggest that the problem of distinguishing See n. 10 above.

'* Royal Commission on the Income Tax 1920. App. No. 1 being a Brief History of the Income Tax, prepared by the Board of Inland Revenue.

74 The Law of Tax and the Common People sheep and goats In the tax avoidance field defeats analysis. It may be difficult to identify comprehensively and with precision the factors which characterise such schemes for the schemes are many and varied. The categories of fiscal ingenuity are not closed. A common starting point is to find a statutory relief or other provision in the tax code normally invoked to obtain a reduction in a taxpayer's liability in the context of some commercial transaction. A transaction bearing a marked resemblance to such a commercial transaction is then engineered and the relief or deduction is claimed.

In February and March 1962 the case of/. P. Harrison (Watford) Limited v. Griffiths11 came before the House of Lords. The taxpayer company purchased shares pregnant with dividend. It extracted or "stripped" the dividend. It sold the shares at a loss. It claimed relief for this "trading" loss against the tax notionally deducted from the dividend. If the purchase of the shares, the stripping of the dividend and the sale of the shares constituted either a transaction carried out in the course of a share dealing trade or of itself was an adventure in the nature of trade, the claim for loss relief must succeed. It was the task of the Special Commissioners before whom the appeal came to decide the facts. They did. They found that the taxpayer company's transaction in the shares (the purchase and sale and the intermediate stripping of the dividend) was not entered into as part of any trade of dealing in shares and was not an adventure in the nature of trade. A straightforward question to be decided on the facts you might suppose. A minority of the judges (Lord Reid and Lord Denning in the House of Lords, Lord Justice Donovan in the Court of Appeal) before whom the subsequent three appeals came took that view; but a majority, including the critical majority of three to two in the House of Lords, took the view that the true and only reasonable conclusion contradicted the determination of the Special Commissioners. There was a purchase, there was a sale. The shares were purchased to be sold. That was a trade. That was that.

Nine years later the case of Lupton v. F.A. & A.B. Limited16 came to the House of Lords. In the intervening years Parliament had been busy blocking loopholes as new and ever more dazzling tricks were displayed on the high wire of dividend stripping. The [1963] A.C. 1, 40 Tax Cas. 281.

[1972] A.C. 634, 47 Tax Cas. 580.

s. 65 and Sched. 17 FA 1965; Sched. 14, para. 10 and Sched. 19, para. 21 FA 1969.

The Law of Tax and the Common People 75 statutory provisions, however, made no difference to the FA & AB case. On somewhat similar facts to the Harrison case the House of Lords decided the case the other way. Two of the five Law Lords distinguished the facts from the facts in the earlier case; two thought the earlier decision wrong; one reassessed the earlier decision. All five considered the relevant transaction not to be share-dealing within the trade of dealing in shares. Lord Donovan described the transaction as the planning and execution of a raid on the Treasury using the technicalities of revenue law and company law as the necessary weapons. The Special Commissioners were, of course, wrong once again. They had followed in the second case the decision of the House of Lords in the first case.

What happened in the dividend-stripping saga illustrates a number of points. First, and by the way, it reduces some lingering illusions that the distinction is dominant between a case which raises a question of fact and a case which raises a question of law. Those interested in pursuing that topic are referred to Chapter 2 of an interesting and commendably brief book by Dr. Farnsworth, Income Tax Case Law. Dr. Farnsworth reviewed the authorities as they stood in 1946 and showed how they treated a question of degree as a question of fact, such questions being left under the tax code to the appeal commissioners to decide. Since then the case of Edwards v. Bairstow21 has been decided. One practical result of that decision seems to be that if a judge on appeal takes the view that appeal commissioners got it wrong, he will say so without further ado and will reverse their decision. On the other hand if he agrees with the appeal commissioners, he may well say that their decision is one of fact and that he has no power to reverse it, even if he would. In truth, the statutory requirement that an appeal is confined to questions of law has never, I would suggest, been of great significance and is of minimal significance today. The judge or judges who have to decide an appeal also have to decide whether the issue raised is an issue of fact or of law. If they think the reasoning of the commissioners to be wrong or their conclusion absurd, they say so.

That is the function of an appellate court. Those who have to decide appeals at a lower level will have their own views. That is inevitable.

They may even be persuaded on occasions that they were wrong. It can happen. That is salutary but unimportant. Someone has to give A. Farnsworth Ph.D., LL.M. Income Tax Case Law, Judicial Interpretations of the Income Tax Acts (Stevens & Sons Ltd. 1947).

[1956] A.C. 14, 36 Tax Cas. 207.

76 The Law of Tax and the Common People the final decision. That decision may be the decision of three as against two. At least for the time being it is the law. That is what matters.

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